Commercial Mortgages

What is a Commercial Mortgage?

A commercial mortgage is a financial instrument designed to facilitate business acquisition of commercial properties. It differs significantly from residential mortgages, featuring distinct characteristics such as:

1. Lower Maximum Loan-to-Value (LTV): Commercial mortgages often have a lower maximum loan-to-value ratio compared to residential mortgages. This means businesses may need a higher upfront deposit or equity to secure the loan.

2. Variable Interest Rates: While variable interest rates are common for commercial mortgages, fixed-rate options are available upon request. This provides flexibility for businesses in choosing a rate structure that aligns with their financial strategy.

3. Higher Interest Rates: Commercial mortgage interest rates typically run higher than residential rates. However, these rates can be subject to negotiation, allowing borrowers to tailor terms to their specific circumstances.

When contemplating a commercial mortgage, it is crucial to consider the following factors:

1. Business Sector Experience (for Owner-Occupiers): Lenders often assess the borrower’s expertise in the relevant business sector, especially in cases of owner-occupier mortgages.

2. Landlord/Property Investment Experience (for Third-Party Rentals): Lenders often assess the borrower’s expertise in the relevant business sector, especially in cases of owner-occupier mortgages.

3. Available Deposit: The borrower’s ability to provide a substantial deposit or equity is a critical factor in securing a commercial mortgage.

4. Purchase Costs: Consideration of all associated purchase costs, including legal fees, surveys, and any other relevant expenses, is essential for accurate financial planning.

5. Debt Serviceability Calculation: Lenders assess debt serviceability based on adjusted net profits of the target business or other businesses operated by the borrower. This evaluation is crucial for determining the borrower’s ability to meet mortgage payments.

6. Investment Property Rental Income: In the case of an investment purchase, the amount of rent generated by the property plays a key role in servicing the mortgage. The strength of the lease covenant and remaining lease term are also important considerations.

Navigating a commercial mortgage requires a comprehensive understanding of these factors to ensure a well-informed and successful borrowing experience.

Types of Commercial Mortgage

There are two main types of commercial mortgage, each suited to different investment goals and each impacting the kind of rates and finance that lenders will offer.

1. An owner-occupier mortgage: This allows businesses to invest in commercial properties to let out to other businesses.

2. A commercial investment mortgage: This allows businesses to invest in commercial properties to let out to other businesses.

In both cases, it is important to remember that you are unlikely to receive a loan for 100% of the cost of the property. Typically, lenders require deposits of 25-40% for these mortgages. Having a reputable and experienced broker assist you will help you find a deal that works best for your business.

Commercial Mortgage Rates and Fees

This form of financing typically comes with a fluctuating interest rate, wherein you will be subject to a rate based on either the Bank of England base rate or the lender’s minimum base rate, resembling a residential tracker mortgage. The specific amount over the base rate, determined by factors like loan-to-value ratio, debt service cover, and industry experience, is contingent upon your investment risk profile.

Furthermore, it’s important to anticipate various fees incorporated into your mortgage, including lender arrangement fees, valuation fees, legal fees, and broker fees. For additional insights on commercial mortgage rates, you can explore further information here.

Eligibility Requirements for Commercial Mortgages

Commercial mortgage eligibility is determined by evaluating your background, experience, and your ability to meet monthly repayments. Prospective lenders require assurance that you can repay the loan, often necessitating a comprehensive business plan outlining how your business will cover repayments. Lenders conduct background checks during underwriting, scrutinizing net worth, deposit source, and reviewing personal or business bank statements for financial conduct. Historical financial accounts spanning two to three years for the existing or target business may also be assessed.

Additionally, lenders commission independent valuations for freehold properties or business appraisals. Valuers assess the value of the trading business, distinguishing between business (goodwill) and freehold values. In cases of property rental, factors like market rent, tenant/lease quality, remaining lease term, and price per square foot are considered, supported by comparable evidence from previous sales.

It’s important to note that a poor credit rating doesn’t necessarily disqualify you from obtaining a commercial mortgage, but it can present challenges. Similarly, if the business has a limited trading history (less than three years), lenders may approach with caution, potentially affecting borrowing amounts or loan terms. Utilize our mortgage calculator to estimate your repayments [link to the calculator].

How Do Commercial Mortgages Work?

Commercial mortgages designed for owner-occupiers typically offer more favorable interest rates compared to unsecured commercial loans. This often results in more affordable repayments, making it feasible for businesses to plan and secure tenure. These mortgages typically have a duration of 10 to 25 years, commonly structured as repayment mortgages with variable interest rates linked to the Bank of England Base rate. They usually cover approximately 60% to 75% of the freehold property value. While some lenders may consider lending against a percentage of the ‘going concern value,’ it’s important to note that additional security may be required.

On the other hand, if you are investing in commercial property for rental purposes, interest rates may be higher. However, some mortgages are available on an interest-only basis, resulting in lower monthly repayments. The property’s actual rental income or potential rental income is crucial in servicing the mortgage, with lending typically capped at 65% to 75% of the investment value. It’s worth noting that in this scenario, the emphasis is on the property’s income potential to cover the mortgage costs.

Benefits of Commercial Mortgages

When contemplating a commercial mortgage, it is crucial to consider the following factors:

1. Capital Appreciation:As the property’s value increases over time, businesses stand to gain from capital growth. This presents a valuable asset that can contribute to overall financial stability.

2. Cost-Effective Monthly Payments: Commercial mortgages often offer more budget-friendly monthly payments compared to renting commercial space. This can result in significant cost savings, allowing businesses to allocate resources more efficiently.

3. Business Location Security: Owning the freehold of the property ensures the stability of the business location. This eliminates concerns about lease renewals or relocations, providing a secure and established base for operations.

4. Immunity to Rent Increases: Unlike rented properties, businesses with a commercial mortgage are not susceptible to rent hikes. This shields them from unpredictable increases in occupancy costs, providing greater financial predictability.

5. Tax Advantages: The interest paid on a commercial mortgage is typically tax-deductible, offering businesses an opportunity to reduce their taxable income. This can result in additional savings and improved overall financial performance.

6. Revenue Generation through Renting: If the business owns additional space within the property, there is potential to generate additional revenue by renting out surplus areas. This dual-purpose utilization enhances the property’s value proposition.

In summary, opting for a commercial mortgage empowers growing businesses with financial advantages, property appreciation, and increased control over their operational space. The combination of these benefits contributes to long-term stability and financial flexibility.

Finding Competitive Commercial Mortgage Rates

Given the substantial investment and financial commitment involved, it is prudent to explore the option of engaging a commercial mortgage broker. These professionals bring industry expertise, a valuable network of lenders to tap into for your business, and the capability to present your case professionally to lenders. Opting for a broker represents a reliable avenue to secure the most favorable mortgage terms for your business.